Canada’s housing market, which was in the midst of a rebound, has received a setback due to the Bank of Canada’s decision to raise interest rates. Experts suggest that the rate hike will exert downward pressure on home prices, which have already rebounded faster than anticipated. This article explores the potential effects of the rate hike on the housing market and highlights the challenges faced by mortgage borrowers and potential buyers.
Impact on Home Prices and Market Sentiment:
The Bank of Canada’s rate hike is expected to dampen housing sentiment and put a strain on the ongoing rebound. Analysts state that the stress test for borrowers will become more challenging, potentially affecting those on the margins. While house prices had started to stabilize, the rate hike could disrupt this trend and lead to a stall in the market. The increase in interest rates may dissuade some prospective buyers from making a purchase and prompt them to step back from the market.
Effect on Mortgage Borrowers:
Variable-rate borrowers will be the first to experience the impact of the rate hike. Homeowners with variable-rate mortgages and home equity lines of credit (HELOCs) will face additional increases in their interest rates, adding to the financial strain caused by previous rate hikes. For instance, a homeowner with a 10% down payment on a $716,083 home with a five-year variable rate of 5.55% amortized over 25 years will see their monthly mortgage payments rise by $98, or $1,176 per year, due to the 25-basis-point rate increase. The lowest variable rates are predicted to reach 6.05%, resulting in an approximate $18 monthly increase for every $100,000 of mortgage.
Expectations for Future Stability:
While the rate hike adds financial stress for mortgage borrowers and potential buyers, there is hope for stabilization at the Bank of Canada’s next announcement in July. The housing market may undergo a temporary stall due to rising rates and the psychological impact they have on buyers and sellers. However, the market’s response will largely depend on future rate decisions and how they align with economic conditions.
The Bank of Canada’s decision to raise interest rates has dealt a blow to Canada’s housing market rebound. With downward pressure on home prices, the market may experience a temporary stall as prospective buyers reassess their options. Mortgage borrowers, particularly those with variable-rate mortgages and HELOCs, will face additional financial strain. The stability of the housing market will depend on future rate decisions and their impact on buyer sentiment.
Source: https://financialpost.com/real-estate/mortgages/bank-of-canada-rate-hike-stomped-housing-market
Since before the Budget Day on April 16, Prime Minister Justin Trudeau has been making announcements addressing the housing crisis facing the North American nation. From incentivizing the construction of affordable housing to reconstruction, these plans promise to improve the housing infrastructure of Canada.
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Canadian housing activity was largely stable in March, but a key spring selling season lies ahead. Existing homesales edged up 0.5% in March (seasonally adjusted) and were up a modest 1.7% from sluggish year-ago levels (although an early Easter long weekend likely reduced volumes somewhat). While current activity might seem quiet compared to the exuberance in 2021 and early 2022, sales volumes are trending about in line with pre-COVID norms, albeit at the low end of that range.
“We are changing the way we build homes in Canada. In our housing plan and Budget 2024, we are delivering ambitious action and investments to build more homes, make it easier to rent or own, and help the most vulnerable with stable housing. This is about restoring fairness for every generation, and housing is at the heart of that”, said Canadian Prime Minister, Justin Trudeau about the country’s new housing plan.
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